The Battle of Britain: The Post-Brexit Regulatory Landscape in the United Kingdom

Thomas Bourneuf

VOL. 39 Associate Editor

Introduction

As the United Kingdom (UK) prepares to leave the European Union (EU), a war is raging in Europe over which EU regulations will survive the exit. On the one side of this struggle are those that favor a “hard” Brexit, wherein the UK would devise their own regulatory standards and trade with the EU like any other non-EU-member country under World Trade Organization (WTO) rules.[1] On the other side, those that favor a “soft” Brexit, favor an outcome wherein the UK would retain membership of the EU single market for specific sectors of the economy, according to European Economic Area rules, so long as Britain adopts similar regulations as the EU.[2]

While there has been a notable lack of details to the exit,[3] both the UK and the EU have suggested broad solutions to this disagreement.[4] This article examines two prominent solutions: First, the “Three Baskets” approach, suggested by Theresa May, represents a “soft” Brexit; Second, the Free Trade Agreements represents a “hard” Brexit. This examination will cover the key features of both approaches, as well as the pros and cons of each approach, and examine why it is unlikely that the UK will have the pick and choose method it desires.

“Three Baskets” Approach

In her September 2017 Florence speech, Theresa May outlined her vision for a post-Brexit Europe. Included in her speech was the so-called “Three Baskets” approach to Brexit, wherein post-Brexit regulation would fall into three categories. [5] The first category is where the UK wants to achieve the same regulatory standards as the EU through the same means.[6] The second category is where the UK wants to achieve the same regulatory standards as the EU but by adopting different rules and regulations to achieve them.[7] The third category is where the UK wants to obtain different regulatory standards as the EU and through different means.[8] As part of the proposal, the UK would maintain full access to the single market in areas where the UK remains consistent with the EU.[9]

The main advantage to the Three Baskets approach is that it would allow the UK to incorporate many of the EU regulations which it currently follows. As stated by Ms. May, “[the UK] start[s] from an unprecedented position. For we have the same rules and regulations as the EU – and our EU Withdrawal Bill will ensure they are carried over into our domestic law at the moment we leave the EU.”[10] Furthermore, such a structure would allow the British government to benefit from key areas of the single market while allowing the UK to compete with the EU in other areas of the economy.

Ms. May’s vision, however, has been attacked inconsistent with the notion of harmonization.[11] “Harmonization” refers to the process of creating common standards across the EU member states.[12] Established by the Treaty of Rome, the goal of harmonization has created tension with the free-market aims of European integration as many areas of regulation have been left to the member states.[13] As a compromise, the concept of “mutual recognition” was created and refers to a process whereby, as a rule, products in one EU country are also legal in other EU countries.[14] Problematically, the Three Baskets approach obtains the benefits of mutual recognition without the costs of harmonization. For further illustration, the European Commission, in anticipation of this proposal, rejected the approach as cherry-picking, stating that “[the UK] cannot have the same rights and benefits as a member of the Union, as it does not live up to the same obligations.”[15]

Free Trade Agreements

Alternatively, the European Commission has signaled that the most extensive agreement they are willing to accept is a Free Trade Agreement (FTA) between the EU and the UK.[16] The purpose of FTAs is to “enable reciprocal market opening with developed countries and emerging economics by granting preferential access to markets.”[17] Rather than allow free trade in certain areas of the economy, FTAs do not allow full market benefits in any sector.

FTAs generally support the hardline approach taken by the 27 remaining European Countries.[18] First, FTAs support the principal that non-member states cannot have the same rights and benefits as a member state because they do not have the same obligations.[19] Second, preserving the integrity of the single market excludes sector-by-sector participation.[20] A sector-by-sector participation approach has been tried, and has failed, in several previous agreements.[21] Finally, such a hardline approach signals to other members the consequences of leaving the union.

A difficulty to implementing such FTAs is the economic importance of the UK to the EU. Prior to the EU Referendum, the UK was the 3rd largest net contributor to the EU budget and obtained 54% of their exports from other EU countries.[22] Furthermore, in 2015 imports from the EU into the UK were valued at £390 billion.[23] This economic reality will make it difficult for the European Commission to push a hardline agreement as they will not want to risk the economic benefits that the British economy provides.

Conclusion

In the upcoming weeks and months, the haze over this battlefield will begin to clear as more details are released about proposed Brexit outcomes. Given the wide gap between these two approaches, it is unclear what compromises, if any, can be agreed upon which will allow the United Kingdom’s continued participation in the European Union. Given the great incentive for the EU to maintain ranks, it seems unlikely that the UK’s defiant rhetoric will stand.

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